Why gasoline could be in short supply this summer on East Coast

If Sunoco shutters a big oil refinery in Pennsylvania, gasoline to make up for the lost supply will need to be shipped to the East Coast from the Gulf coast or from Europe – and it will be a logistical nightmare to get it there.

ByRon Scherer, Staff writerMarch 28, 2012

Drivers on the Massachusetts Turnpike fill up in Framingham, Mass. Falling demand has created excess oil refining capacity in the US, and some refineries have been shutting down. That may create regional supply shortages.

New York — For sale: unprofitable Sunoco refinery in Philadelphia; supplies 24 percent of East Coast's gasoline; must sell by July 1 or will be shut down.

Really, no kidding.

The petroleum industry is shutting down US refineries, especially in the East, almost as fast as Americans are trading in their gas guzzlers for fuel sippers – and that does not bode well for East Coast motorists this summer.

The closures mean gasoline refined elsewhere – the Gulf Coast or even Europe – will need to be shipped to the region by tanker, barge, or rail, causing higher prices at the pump and perhaps even supply disruptions in places like Washington, New York, and Boston.

As demand for gasoline has slackened (due in part to a weak economy and greater fuel-efficiency for cars), refiners have struggled to sell enough product to stay in business. Several refineries that supply gas to the East Coast have already closed: Hess has shuttered a major refinery in the US Virgin Islands; ConocoPhillips has stopped making oil products at a refinery in Trainer, Pa.; and Sunoco has already closed another, smaller refinery near Philadelphia.

If Sunoco cannot find a buyer for its big Philadelphia refinery, almost half of the total East Coast refining capacity will be in mothballs. Overland pipelines bringing gasoline to the region are already running at capacity, so there's no hope for making up the difference that way.

"It is going to be expensive this summer to get gasoline to East Coast markets," says Sander Cohan, a principal at Energy Security Analysis Inc., a research firm in Wakefield, Mass. "It would not be surprising to see an average of $4.50 a gallon [in those markets], which means it could be $5 a gallon in some places."

Just how dire the supply situation becomes in the East hangs on the fate of the Sunoco refinery in Philadelphia, situated along the Schuylkill River. The plant has been refining crude oil since the 1860s. Sunoco says there has been "limited interest" among buyers.

Industry observer Tom Kloza, publisher of Oil Price Information Service (OPIS), expects something will happen to keep the Sunoco refinery running. "I think heaven and earth will be moved to make sure [closure] does not happen," he says. "Everyone is concerned."

But if the plant is shuttered, some warn that a solution is not close at hand for bringing in "replacement" gasoline.

The industry may not be able to get a smooth supply line worked out for a year, warned the US Energy Information Administration in a February analysis. Until oil companies know whether the Sunoco refinery will be open or closed, they "are not likely to make significant investments in new logistical arrangements," the EIA said.

The problem can be traced to refineries' added expenses due to "a blizzard of regulations" from the Obama administration that require the industry to make cleaner and cleaner fuel, says Mr. Gerard.

Lynn Elsenhans, Sunoco's chief executive officer, said in a February letter to a Pennsylvania state legislator that the firm had lost $900 million in the past three years on its Northeast refineries. "Our view is that the difficult conditions that led to these substantial losses will continue over the next several years," she wrote.

One of those conditions is falling demand for gas. Demand is down in the Un­ited States 5 to 7 percent this spring compared with a year ago. As a result, refineries in the Gulf of Mexico have lots of spare capacity and are now exporting 600,000 barrels of gasoline per day. In her letter, Ms. Elsenhans wrote that demand is expected to fall 16 percent "over the next few years."

Demand is falling in part because US consumers are driving less, a consequence of both a slack economy and high prices at the pump. And when they do drive, their vehicles are using less gas. The US government has mandated that the vehicle fleet achieve an average mileage standard of 34.1 miles per gallon by 2016, and those gas-sipping vehicles are already showing up in dealer showrooms. The new mileage standard alone is expected to cut gasoline demand by another 13 percent – equal to the output of 18 refineries – within the next decade, says Elsenhans.

After this summer, the logistics of supplying gasoline to the East Coast will get easier. By 2013, the Colonial Pipeline, which connects Gulf refineries with East Coast markets, will expand by 100,000 barrels a day, a 10 percent boost in capacity. An expansion of another pipeline that carries distillate (heating oil and diesel) should be finished by mid-2012.

Mr. Kloza, the OPIS publisher, notes that there is no shortage of gasoline. One way to expedite barge shipments of gasoline to the East Coast, he suggests, would be for the Obama administration to waive the Jones Act, which requires all goods moving between US ports to be on US-flagged, US-built ships crewed by US citizens. That would allow foreign-flagged tankers to help move gasoline.

The White House had no comment about whether it has a plan to relieve a possible gasoline shortage in the East.

Sunoco, for its part, says on its website that it has taken steps to "ensure the reliability" of supply. But, it adds, it will take the entire industry to solve the problem.

As for Sunoco's large refinery, Mr. Cohan expects someone will buy it. "Its key value is storage capacity and access to domestic markets," he says. "They just have to think creatively about these units."